Suddenly resigned "effective immediately" on 27 April 2007 as Director of the US Agency for International Development after admitting that he had been a client of Pamela Martin and Associates escort services, managed by Deborah Jeane Palfrey. Tobias told ABC News that he had received only massages, and "no sex".

In May 2004, as ambassador for the President's Emergency Fund for AIDS Relief, Tobias opined: "Statistics show that condoms really have not been very effective." He also enacted morals rules for the AIDS office, including an effective "zero tolerance" for prostitution, rules which cut off federal funds to groups offering anti-AIDS outreach programs for sex workers.